Bear Stearns' Greenberg dismisses cash crunch talk

By Joseph A. Giannone

NEW YORK (Reuters) - Bear Stearns Cos BSC.N and its former chief executive denied on Monday market speculation that the investment bank faced a cash crunch, helping pare losses after its shares had fallen to a five-year low.

Bear's chairman of the executive committee, Alan "Ace" Greenberg, told Reuters speculation that the investment bank and securities firm was facing liquidity problems were "totally ridiculous."

Shares of Bear had fallen as much as 14 percent to a five-year low amid speculation that the bank, which suffered heavy mortgage-related losses last year, was facing a cash crunch.

"They're totally ridiculous," Greenberg, a legendary trader who ran the investment bank as CEO from 1978 to 1993, said of the market talk. "They're rumors. What can I do about it?"

After the denial, Bear shares pared their losses. In afternoon trading, the stock was down $7.55, or 10.8 percent, to $62.53 a share, after sinking as low as $60.34 earlier. The overall stock market was weak, with the Standard & Poor's 500 index .SPX off 1.3 percent.

Bear spokesman Russell Sherman also denied the speculation, saying: "There's no truth to the liquidity rumors in the marketplace."

But investors in several financial markets seemed prepared to believe the worst about the firm, which made part of its fortune trading mortgages and other debt over the years, in this period of intense stress in the financial services sector.

The cost of insuring $10 million of Bear Stearns debt for five years widened to as much as $650,000 per year in the credit default swaps (CDS) market, according to broker Phoenix Partners Group. The swaps closed on Friday at the equivalent of

$452,000.

Options traders also reacted aggressively to rumors of liquidity concerns. In afternoon trade, roughly 133,000 puts compared with 52,000 calls had changed hands in Bear Stearns, four times the normal volume, according to option analytics firm Trade Alert.

"Put volume more than tripled in morning trade as traders bought puts seeking protection against further share losses over the next 10 days," said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.

The rumors pushed the premium of the March $60 put to a high of $6.30 a contract, but the price came off later to $3.80, Darst said.

The credit market crisis has taken its toll on Bear, the fifth-largest U.S. investment bank.

Bear reported a fourth-quarter loss of $854 million, its first ever, after taking a $1.9 billion mortgage-related write-down. Analysts have over the past month slashed expectations for its first-quarter earnings.

According to a Keefe, Bruyette & Woods research report last week, Bear Stearns had $600 million in leveraged loan exposure, $760 million of CDO exposure and $15 billion of commercial real estate at the end of November.